Sangoma Technologies
(STC-T) C$20.30
Highlights from Investor Meetings Event
Last week, we hosted investor meetings with President and CEO Bill Wignall and Chief Corporate Officer Larry Stock.
Impact: NEUTRAL
Ready for the next acquisition. With the Star2Star integration mostly complete and leverage levels continuing to decline (~1.7x net debt/pro forma Adj. EBITDA), Sangoma is spending more time evaluating M&A opportunities.
Mr. Wignall indicated that investors should not expect future deals to be increasingly larger than prior ones, like we have seen previously. One reason is the smaller number of targets as deal sizes increase but also management remaining disciplined on the M&A front, only targeting companies that meet the majority of its key criteria, regardless of their size.
Given Sangoma's history of announcing an acquisition every year, we expect the next deal to be announced soon (i.e., sometime in 2022).
Looking to rely more on debt to fund M&A activity. Given the pullback in the stock in recent months, similar to the broader technology sector, management indicated an increased preference to use more (lower-cost) debt to fund future acquisitions compared to past ones. With the stock down almost 30% from its recent high and ~25% below the value when the Star2Star acquisition was announced (~C$27/ share), Sangoma is reluctant to issue equity at these levels, as evidenced by the withdrawn U.S. IPO. Accordingly, we believe Sangoma may become even more selective on the M&A front and may favour relatively smaller deals that could be mostly or completely funded with debt.
Focused on driving faster organic growth. Although acquisitions have played a key factor in Sangoma's growth to-date and is likely to continue to do so going forward, in our view, the company has also generated healthy organic growth.
We estimate F2022 guidance implies organic growth of ~10%. Given management's solid track record of raising/beating guidance, we note that organic growth could come in stronger, helped in particular by expected revenue synergies from Star2Star cross-selling opportunities. As well, management talked about investing more in S&M and R&D, including reinvesting all Star2Star cost savings, to help drive stronger demand, with a greater emphasis on increasing its brand recognition in the market.